10
MARKET OVERVIEW
We wanted to start with a brief history of
the EIS market to help advisers put it into
its historical context and a look at the rules
for qualifying companies. Advisers who are
already up to speed with this information
may want to skip ahead to the ‘Why Invest
in Smaller Companies?’ section on page 14.
EMERGENCE OF EIS
The first initiative to be taken with a view
to encouraging investment in small private
trading companies was a facility for capital
losses on unquoted shares to be relieved
against Income Tax. This was introduced in
1980 and remained substantially unchanged
until 1998, when it was aligned with the
provisions of the EIS.
In 1981, a scheme called the Business
Start-Up Scheme was introduced.
This was superseded in 1983 by the
Business Expansion Scheme (BES), which
provided relief for investment in both new
and existing trading companies, designed to
encourage private investors to provide
venture capital for unquoted companies,
initially for a minimum of five years. In
1986, BES was extended to give exemption
from CGT in cases where BES relief had
been given.
The BES gave upfront tax relief at the
investor’s marginal rate of Income Tax
and allowed a wide range of assets to
be invested in, including residential
property. This led to some abuses
of the scheme as it was used as a
tax shelter rather than incentivising
investors to place capital at risk.
BES came to an end at the end of 1993,
replaced by the Enterprise Investment
Scheme in 1994. This represented a revision
and fine tuning of BES, adding Income Tax
relief on subscriptions and CGT exemption,
as well as CGT deferral relief.
The next major revision was in 1998,
when CGT deferral relief became available
whether or not Income Tax relief had been
obtained on the new shares. In this way, it
effectively replaced a set of CGT provisions
known as Reinvestment Relief, which was
then abolished.
In 2012, the Seed Enterprise Investment
Scheme (SEIS) was introduced, which was
aimed at encouraging investment into even
smaller companies, with even more
attractive tax benefits. SEIS is outside the
scope of this report.
KEY POLICY CHANGES
There have been some policy changes
to the scheme since its inception:
1997-98
From 17 March 1998,
farming, market gardening, property
management, hotels, guest houses and care
and nursing homes became ‘excluded
activities’.
1998-99
From 6 April 1998,
Capital Gains Tax deferral relief was
extended to include shares that did not
qualify for Income Tax relief. In addition, a
company’s gross assets limit of £15m before
investment and £16m after investment was
introduced. Prior to this, there was no limit
on company size, but a company could only
raise up to £2m per tax year through EIS
(though certain qualifying shipping activities
could raise up to £5m). Also, the maximum
amount of investment on which Income Tax
relief could be obtained was increased from
£100,000 to £150,000.
1998-99
Capital Gains Tax
exemption was introduced from 1 January
1999.
2000-01
The period for which
shares must be held to retain Income Tax
relief was reduced from five years to three.
2001-02
The requirement that all
money be employed in qualifying activities
within 12 months was changed to 80% (with
the remaining 20% to be employed within
the next 12 months).
2004-05
The maximum amount
of investment on which Income Tax relief
could be obtained increased from £150,000
to £200,000.
2006-07
Gross assets limit was
reduced to £7m before investment and £8m
after investment. Maximum amount of
investment on which Income Tax relief could
be obtained was increased from £200,000
to £400,000.
2007-08
From 19 July 2007,
companies must have raised no more than
£2 million per annum under any or all of the
tax-based venture capital schemes (Venture
Capital Trusts, Enterprise Investment
Scheme and, available at the time,
Corporate Venturing Scheme).
2008-09
The maximum amount
of investment on which Income Tax relief
could be obtained increased from £400,000
to £500,000.
2009-10
The time within which
monies raised by the share issue must be
employed was extended from 80% within 12
months and the remainder within a further
12 months, to 100% within 2 years.
2011-12
The requirement that the
trade be carried on wholly or mainly in the
UK was removed, and replaced with a
requirement that the issuing company have
a permanent establishment in the UK.
Companies whom it would be reasonable to
regard as ‘enterprises in difficulty’ as
defined by the European Commission, were
excluded. The EIS rate of relief was
increased to 30%.
2012-13
From 6 April 2012, EIS
was extended to companies with fewer than
250 full time equivalent employees and
gross assets of no more than £15m before
investment and £16m after investment. The
annual investment limit for companies
increased to £5 million: that sum must take
account of Venture Capital Trusts (VCT) and
SEIS investment, and any other investment
received via any measure covered by the
European Commission’s Guidelines on State
Aid to promote Risk Capital Investment in
Small and Medium-sized Enterprises. For
shares issued on or after 6 April 2012, a
company using the funds to acquire shares
in another company will not be regarded as
using them for a qualifying purpose. The
annual investment limit for an individual
was increased to £1m, and the £500
minimum investment requirement was
removed. Most trades attracting Feed-In
Tariffs or overseas equivalents were
excluded.
It’s not necessary for advisers and investors
to remember all of this history, but perhaps
the key point to take away from this is
that there is a long history of government
support for tax incentives that encourage
investment into smaller companies. EIS is
not a new, untested idea – it is a
well-established market that
has been around for some time
in one form or another.
